Small-Cap Value ETFs: Vanguard vs. iShares

Investors choosing between Vanguard Small-Cap Value ETF (NYSEMKT:VBR) and iShares Morningstar Small-Cap Value ETF (NYSEMKT:ISCV) must weigh the Vanguard fund's lower costs and superior long-term performance against the iShares fund's broader portfolio and slightly higher yield.

Small-capitalization value stocks often provide a diversification benefit for portfolios dominated by large-cap growth. While both VBR and ISCV target this specific corner of the market, differences in indexing strategies, costs, and liquidity profiles distinguish these two veterans of the ETF space. Investors often look to these funds to capture the value factor within smaller, more nimble companies that may be overlooked by the broader market. This comparison explores how the two funds balance risk, income, and long-term growth potential in the small-cap arena.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Vanguard fund maintains a narrow cost advantage with an expense ratio of 0.05% compared to 0.06% for ISCV. While a 1-basis-point difference is minor, it can add up for long-term holders of these diversified small-cap portfolios. In terms of income, the iShares fund currently offers a slightly higher trailing-12-month distribution yield. Both funds provide semi-consistent income, though their primary objective remains capital appreciation through value-oriented selection. The iShares fund's yield may appeal to those seeking a slight edge in cash flow, while the Vanguard fund's massive scale often translates to tighter trading spreads for large institutional or retail orders.

Performance & risk comparison

What's inside

iShares Morningstar Small-Cap Value ETF tracks a portfolio of 1,072 holdings, providing a broader reach than many of its peers. Its sector allocation focuses on financial services at 23.5%, industrials at 13%, and consumer cyclical at 12.7%. Its largest positions include CF Industries at 0.63%, Ovintiv at 0.57%, and TD Synnex at 0.57%. This iShares fund launched in 2004 and paid $1.41 per share over the trailing 12 months.

Vanguard Small-Cap Value ETF follows a similar trajectory but with 838 holdings, focusing on a slightly more concentrated set of companies. Its sector mix is led by industrials at 21.6%, financial services at 18%, and consumer cyclical at 14%. Its top holdings include NRG Energy at 0.75%, Atmos Energy at 0.74%, and Tapestry Inc. at 0.69%. This Vanguard fund also launched in 2004 and has a trailing-12-month dividend of $4.14 per share.

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What this means for investors

Investors looking to diversify a heavily large-cap-weighted portfolio may benefit from considering a small-cap value ETF like VBR or ISCV. VBR boasts a much larger portfolio of assets under management than ISCV, plus a marginally lower expense ratio. On the other hand, ISCV has more holdings, a slightly higher dividend yield, and has gained a bit more over the last year as of April 30. More assets under management usually means more liquidity and a lower expense ratio, which may appeal to investors looking to maximize capital preservation (VBR also has a slightly lower max drawdown over the last five years).

Differences in the indexing strategies for these two ETFs may also sway investors. VBR’s largest sector allocation is industrials, while ISCV’s is financial services. Both can be considered all-weather investments. The differences separating these two ETFs appear to be relatively minor, and choosing one over the other may come down to your personal preference or even the funds’ individual holdings.

Sarah Sidlow has no position in any of the stocks mentioned. The Motley Fool recommends Tapestry. The Motley Fool has a disclosure policy.